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Look Into the Future: The State of Food & Beverage Industry

Jan. 4, 2010
The state of the nine categories of the food & beverage industry and what 2010 holds for them.

The food & beverage industry really is a collection of reasonably disparate yet surprisingly interconnected food categories. As distinct as milk may appear, dairy as an ingredient permeates many other categories. While fruits and vegetables may seem synonymous with fresh produce, they’re components in many other categories.

While the turn of the calendar page is an arbitrary milepost in the continuum that is time, it does cause people to pause, to reflect on the previous 12 months and to peer into the year ahead. That’s what we’re doing here.

So, to get a handle on the year ahead for the whole food & beverage industry, we’re going to break it down into nine discrete units and look backward and ahead at each. What emerges is a quilt of opportunities but also challenges for everyone in this business of food. Bakery & Bread: Rise to the occasion
From breakfast bagels to lunchtime sandwiches to dinner rolls, the bread market is weathering the recession quite well. Originally predicted to grow 2.1 percent in 2008, Mintel International’s latest figures show the bread market instead grew 7 percent. Even higher growth is expected for 2009 and through 2013.

In 2008, the U.S. bread market reached $20.5 billion, according to Research and Markets. Fresh bread sales that year were $6.6 billion, compared to $545 million for frozen bread/roll/biscuits/pastry dough and $207 million for bread/rolls/bun dough, reports Baking Management. Bread sales in all categories had gains in 2008.

Key new product trends in the bread aisle include whole grains, fiber, added calcium and products designated organic, all-natural or HFCS-free.

Whole grain breads are expected to remain strong, and consumers also are demanding more natural breads with nutritional ingredients, premium breads that feature quality ingredients and artisan breads. Traditional or “ancient” grains, such as amaranth, quinoa, sorghum or spelt, will become more popular, especially for wheat-intolerant consumers, according to Mintel.

“An increasing number of consumers are adopting a ‘natural lifestyle’ with a focus on health and well being that includes green living, sustainability and natural products,” says Stephany Verstraete, vice president of bread marketing at Hostess Brands, Irving, Texas. To that end, Hostess – the new name for Interstate Bakeries Corp. – in the past year introduced what it claims is the only national brand of natural bread, Nature's Pride.

“Increasing the general nutritional content -- from calcium enhancement to fiber and other nutrients -- will continue to show strength as a trend,” she continues. “We introduced a reformulation of our Wonder Classic and Wonder Classic Sandwich breads to provide the same amount of calcium as 8 oz. of milk in two slices and a good source of vitamin D.”

Last year, some of the nation’s largest bread manufacturers introduced products for cholesterol-conscious consumers, hoping they will look to the loaf as a defense against elevated low-density lipoprotein (LDL), or bad cholesterol. Mexico-based bakery giant Grupo Bimbo’s Arnold (the brand name in the northeastern and southeastern U.S.), Brownberry (the name in the Midwest) and Oroweat each launched plant sterol-enriched loaves. Thomas’ also added the cholesterol-fighting fortifiers to new English muffin and bagel products. And supermarket chain Kroger recently launched six varieties of proprietary Active Lifestyle breads featuring plant sterols.

The irony is, most consumers say that they won't pay extra for healthful bakery items. But for those who will, whole-grain products top the list – along with other grains such as oats, barley, and sorghum -- or specialty products deemed "worth the extra cost." Bakery consumers also say they want products that are locally produced, healthful, all natural and organic — but only if they don't have to pay a premium.

Gluten-free continues to grow in the in-store bakery. An April 2009 Packaged Facts report estimated the size of gluten-free market at $1.56 billion with a compound annual growth rate of 28 percent from 2004 to 2008. These products are sought not only by those with medical conditions requiring a lifelong adherence to a gluten-free diet but also by consumers who believe that a gluten-free diet is more healthful.

When volatile commodity prices affected bakery prices, 61 percent of consumers switched to store brand breads and bakery items, according to What's in Store 2010, the annual trends report from the Madison, Wis.-based International Dairy-Deli-Bakery Association (IDDBA).{pb}

Beverages: Pinata for obesity
The $110 billion beverage industry seems to have its hands full, fighting battles on multiple fronts while also seeing its product categories flat line or recede.

Representing water bottlers, it’s defending the proliferation of plastic bottles – while also joining the debate about bisphenol-A. Perhaps more than any other food category, beverages have been targeted as the cause of obesity, especially in children. While the transformation of vending machines in schools has garnered praise, several cities are considering special taxes on sugar-sweetened beverages.

Despite a lack of scientific evidence, consumers shy away from high-fructose corn syrup, which has become the workhorse sweetener in beverage formulations. Now beverage makers seem to be backing down in their defense of HFCS. On the other hand, while other non-nutritive sweeteners still raise doubts in consumers’ minds, everyone appears gaga over stevia plant extract rebaudioside-A.

It’s a diverse segment, representing alcoholic and nonalcoholic drinks and, in the latter everything from milk to carbonated soft drinks and coffee to bottled water. All the categories that drove growth in recent years – bottled water, sports and energy drinks – are expected to be flat or even down in 2009. Ditto for carbonated soft drinks, the biggest category.

Perhaps no single food has been so singled out as a contributor to childhood obesity. But the industry drafted voluntary national School Beverage Guidelines in 2006, which the American Beverage Assn. claims are paying off. “After two years of a three year implementation … beverage calories shipped to schools have decreased by nearly 60 percent and shipments of full-calorie soft drinks are down by almost two-thirds,” the ABA claims. A final report on the program will be released this year.

Breakfasts & Cereals: Less snap, crackle and pop
Fueled by price increases (a consequence of record commodity prices), the breakfast cereal market yielded moderate gains, up 5.8 percent to $10.8 billion from 2007 to 2009, according to Mintel. A longer-term assessment reveals sales of breakfast cereal grew only 7 percent from 2004-09, and, when adjusted for inflation, sales actually declined 7 percent since 2004.

Cost structures we see are likely to come under pressure over the long term,” A. D. David Mackay, president and CEO, said during Kellogg Co.’s 2009 Analysts Day in November. He noted that grain and energy prices came down in 2009, “and we'd like to believe they will stay down through the bulk of 2010. But if you go out to 2011 and 2012 and a little bit further, there's a general sense and our view is that we will start to see a gradual inflation in costs.”

Kellogg, General Mills, Quaker (owned by PepsiCo) and Ralcorp Holdings (which bought Post cereals from Kraft in early 2008) generated more than 80 percent of cereal sales during 2008-09. Kellogg Co. and General Mills accounted for an astounding 57 percent of the market. However, private label emerges as the fastest-growing player in the market with gains of 12.8 percent to account for 12.3 percent share.

Since 93 percent of respondents to a Mintel Internet survey eat cold cereal and 68 percent prefer hot cereal, the category enjoys high household penetration. Cold cereal accounted for 88.4 percent of the category, with hot cereal accounted for the rest.

One of the challenges is that new product launches tend to cannibalize existing sales, stifling real growth, despite industry efforts to shift cereal usage beyond the morning day part and into snacking and other meals. Growth is further complicated by alternative breakfast foods like cereal bars, which continue to grow.

More than 1,600 cereal bars were launched globally in the first 11 months of 2009, up from the same period in 2008, but well down from 2,000 launched in the same period of 2007, according to the Innova Database. The majority of launches have a health positioning, particularly in the U.S. Only in America has a sub-market emerged for specialized nutrition bars, led by Powerbar, Balance Bar and Clif. Powerbar and Balance Bar were snapped up in 2000 by major multinational food companies (Nestle and Kraft, respectively and Kraft recently sold Balance Bar to a private equity firm). Clif remains independent.

There is also a focus on breakfast by the foodservice industry, and the battle for the consumer breakfast dollar has been intensified. Breakfast sandwich consumption in restaurants is on the rise, according to Chicago-based Technomic. More than three-quarters (77 percent) of 1,500 respondents to a recent survey report buying these sandwiches sometimes or often on weekdays and 70 percent buy them on weekends. Confectionery: Sweet opportunities
America still has a sweet tooth. Confectionery sales increased 3.6 percent for the 52-weeks ending Nov. 1, 2009. Non-chocolate candy sales increased 4.4 percent while chocolate sales grew 2.8 percent. Gum sales rose 5.9 percent during the last year, led by a 7.7 percent increase in sugar-free gum sales. Non-chocolate chewy candy (+11.5 percent), chocolate candy bars (+10.5 percent) and licorice (+4.9 percent) are leading the way to strong everyday sales.

“Despite the down economy, confectionery sales continue to grow – we are up nearly 4 percent in 2009, and have many favorable holiday dates in 2010,” says Jenn Ellek, director of trade marketing and communications for the National Confectioners Assn. (NCA). “We expect more growth in the New Year.”

U.S. chocolate sales in 2009 are expected to hit $17 billion in 2009, according to Mintel, while non-chocolate candy should hit $2.16 billion. Marcia Mogelonsky, a senior analyst at Mintel, said people buy candy and chocolate during tough times for a couple of reasons: "They've given up everything else, but they're not going to deprive themselves entirely; or candy is their replacement for something more expensive, like a nice dinner or another type of gift."

Experimenting with flavors, flexibility and variety, confectionery makers are posting gains and are expected to for the next five years, according to the NCA’s Confectionery Industry Trend Report 2009.

Top trends which will foster growth of the industry through 2014 include: Chocolate explosion into main courses and appetizers; the next big trend in confections will be healthier confectionery options, specifically a growing demand for health benefits and “better for you” ingredients; consumers embracing portion-controlled, calorie-controlled, reduced-fat, sugar-free and fortified products; and the heart-health benefits of higher cacao content in chocolate. Manufacturers will take steps toward social responsibility and eco-friendly manufacturing efforts (such as recyclable packaging), influencing product development and consumer purchasing.

America’s favorite flavor, chocolate, will emerge as one of the growth drivers. Embracing versatility may mean more of an emphasis on global influences and flavor pairings with exotic fruits, flavor infusions that include spices, salts, herbs and floral flavors, and sweet and savory combinations like chocolate and bacon, as well as chocolate and cheese duos.

Oral health care may drive the chewing gum category, and sugar-free options will become increasingly common, along with dental professionals’ backing and approvals from the American Dental Assn.

When it comes to kids’ candies, experts say it’s all about intense new flavors and interactive experiences. Respondents comment that this dynamic category is unique and different from all other products in the market, catering to more attention-grabbing, fun and entertaining products kids like.

While Asian and Latin flavors will serve as the biggest influences on U.S. confectionary product launches, insiders point to Europe as the birthplace for international confectionery trends now and in the coming years. However, Japan appears to be an emerging influencer in the candy industry.

New products are key. “Products launched in the past two years account for nearly 30 percent of U.S. confectionery sales,” Tom Joyce, vice president of customer and industry affairs for Hershey Co., told attendees at the All Candy Expo 2009.

Of course, the big story this year is whether Kraft Foods or some other confectionery competitor will swallow Cadbury. If that occurs, Mars may fall from its perch as global confectionery leader (even after acquiring Wrigley in 2008).

Dairy: If prices stabilize …
The biggest issue in the dairy industry is one that affects other food categories that use dairy ingredients: raw milk pricing. The roller coaster of pricing over the past two years has not been good for milk producers or dairy processors. 2008 saw some of the highest raw milk prices in history while 2009 saw some of the lowest. The Class 1 price mover – the key pricing indicator -- was $18.97 per 100 lbs of milk in the third quarter of 2008, then dropped to $10.41 in the third quarter of 2009. It ought to be somewhere in between.

Pricing affects supply – and vice-versa. Low prices cause dairy farmers to take cows out of milk production and use them for meat. The following year, this causes a shortage of milk and skyrocketing prices. So more cows are brought into milk production … which causes the whole situation to repeat itself.

So the biggest new year’s wish for the people we talked to in the dairy industry simply is a stable and rational price for raw milk.  Todd Dittman, vice president of business development and analysis at Dairy Management Inc. (DMI), the dairy industry’s marketing arm, says there are many reasons to be optimistic about dairy sales in 2010. “The recovering but still low producer price for milk, increasing retail food outlet sales, the popularity of specialty coffee drinks (some contain up to 75 percent milk) at fast food restaurants and the focus on functional foods are all contributors to a strong domestic dairy sales outlook.”

Dittman adds the 2009 price drop was exacerbated by a collapse of world dairy demand.

Lower producer prices allowed processors and retailers to lower their prices to the consumer – which helped increase volume sales. For the 52 weeks ending Nov. 1, 2009, the consumer price for milk was down 15.8%, cheese was down 4.0% and yogurt was down 1.0% from 2008. But volume sales data from IRI shows milk sales increasing 1.0%, cheese up 4.2% and yogurt up 2.8%.

Frozen pizza sales have been exceptionally strong this year, and that is helping cheese sales, he adds.

Dallas-based Dean Foods, the world’s biggest dairy, will be watching two trends in 2010, according to Rick Zuroweste, chief marketing officer of Dean’s Fresh Dairy Direct unit.

  • Simpler, Fresher: “Many consumers are taking a simpler, more natural approach to the foods they eat,” he says. “They look for foods with only a few ingredients. In addition, they want foods as fresh as time and budget will allow.” Milk is a natural for those intertwined trends.
  • Anywhere Health: “Without a doubt, the most important factor driving the healthy and functional food market mainstream has been the increased accessibility of healthy products through additional channels,” Zuroweste continues. “With today’s grab-and-go lifestyle, convenience stores have become a powerhouse for sales of some healthy products.” And milk has always been a big mover at C-stories. “In addition, our WhiteWave Foods business offers healthy, innovative, responsibly produced foods like Silk Soymilk and Horizon Dairy brands in a variety of distribution channels to fill a broad range of consumer needs.”
Frozen Foods: Microwave safe
“Recession proof” frozen food sales grew substantially in 2008, up 6.5 percent to $51.8 billion, according to a new Packaged Facts report, and the prediction is sales will increase by 25 percent to $64.8 billion by 2013. Within the category, breakfast foods were the strongest performers, with a 21.9 percent growth rate between 2004-2008 and a compound annual growth rate of 5.1 percent. Packaged Facts predicts sales of frozen breakfast foods will grow an additional 6.8 percent for the next five years along with vegetables/appetizers/snacks/sides at 6.5 percent for the same period.

As economic problems caused consumers to increase their at-home meal preparation and consumption, Chicago-based NPD Group’s annual National Eating Trends data found that consumers prepared or consumed 871 meals at home on average in 2009, compared with 868 the year before. Convenience is an important factor, thus Americans used their microwave ovens more often -- in fact, 22.5 percent of main meals were prepared in the microwave, up from 21.5 percent in 2008.

“Microwaving has been flat for two decades, but it increased last year as Americans found a way to eat at home and not cook,” says Harry Balzer, NPD’s chief industry analyst.
Omaha, Neb.-based ConAgra’s retail frozen food portfolio – with sales of $2 billion and brands Healthy Choice, Marie Callender’s, Banquet and Kid Cuisine – is undergoing a major renovation. “Following the success of Café Steamers, we reinvented the entire Healthy Choice brand with new products, new packaging and new marketing,” CEO Gary Rodkin points out in the company’s annual report. “That reinvention was a key element of the transformation of our entire frozen foods portfolio.”

And if the frozen food section is the last place you think of for perusing healthy options, it’s time for a rethink. Nestle’s Lean Cuisine makes six brands (One Dish Favorites, Café Classics, Comfort Classics, Spa Cuisine Classics, Casual Eating and Dinnertime Selects) of healthy frozen entree varieties, more than any other brand. H.J. Heinz Co.’s Weight Watchers Smart Ones offers some 56 varieties that range from 140 to 390 calories, an easy option for weight management. Fifteen Kashi All Natural frozen entrée options incorporate whole grains, and Michelina's Lean Gourmet offers more than 31 lean meals, and retail at about one dollar, a great value. Con Agra’s Healthy Choice recently introduced All Naturals varieties.

Fruits & Vegetables: Benefiting from fresh, natural
With consumer trends pointing toward healthy, fresh, natural and minimally processed, the fruit & vegetable category seems poised for a big year ahead. Add to that a potentially higher profile in the expected 2010 Dietary Guidelines.

“With people buying more groceries, cooking more at home and more interested in health, we’ve survived the recession well,” Marty Ordman, vice president of marketing at Dole Foods Co. He said he was speaking for both his company and the category. “Health and nutrition is part of our DNA. We anticipate next year will be very strong.”
While plant-based diets are gaining momentum, a key will be delivering those products in places and in forms that consumers desire, and that means adding value (and margin).

Dole will answer that call with the recent relaunch of its bagged salads. New packaging (including a zipper) adds convenience, new blends add texture and novelty and a new marketing program will make people aware of these embellishments. Dole also is innovating with a new bag that slows the ripening of its bananas.

Dole itself is kind of new, having become a public company again through a stock offering this past summer, although Chairman David Murdock remains the biggest shareholder.

Food safety remains a critical issue. While minimal processing is a produce advantage most of the time, many consumers were made aware of the down side of “fresh and natural” in year-ago food scares that stemmed from vegetables.

While concurring with the themes of fresh, healthy and natural, the Produce Marketing Assn. sees the 2010 consumer grappling with her social conscience, and that includes the sometimes conflicting issues of fair trade, locally grown and environmental responsibility. And for the produce industry and the world at large, 2010 will see more intense discussion about water availability for farmers.Meat & Poultry: Are thing settling down?
The meat & poultry category continues to wrestle with issues of supply, food safety, animal care and environment. Animal protein suppliers were among the hardest hit by skyrocketing feed costs in 2008. Costs greatly abated in 2009, but not before Pilgrim’s Pride, the country’s largest poultry processor, declared bankruptcy, Tyson Foods recorded a $537 million net loss for its fiscal 2009 and Brazilian meat packer JBS gobbled up several assets of U.S. firms.

JBS was the answer to several distress calls. In 2007 it bought beef processor Swift & Co., in late 2008 it acquired Smithfield Foods’ Beef Group and some feedlots and in September 2009 it announced a deal, still pending, to acquire most of Pilgrim’s Pride, enabling that company to exit bankruptcy protection. As a result, it’s now the world’s largest animal protein company. JBS USA in November filed a plan to launch a public offering of stock, as of press time not executed, to raise an estimated $2 billion.

If it’s any consolation, “Americans spend less than any other developed nation in the world on meat and poultry products — about 1.7 percent of our incomes per year today down from over 4 percent in 1970,” said J. Patrick Boyle, president of the American Meat Institute (AMI). “It is amazing to think we are achieving these efficiencies while animal agriculture's environmental footprint is shrinking and its contribution to greenhouse gas emissions (GHG) has remained nearly constant since 1990. This is impressive considering U.S. increases in meat production of almost 50 percent, milk production of 16 percent, and egg production of almost 33 percent.”

Meat and poultry figures to play prominent roles in food safety initiatives in 2010, including a reworking of the FDA and its relationship with the USDA in the Food Safety Enhancement Act and in expected stronger track and trace regulations to speed recalls.

Also on the legislative front, AMI joined the discussion on immigration reform, including implementation of the E-Verify new hire screening program. Salty Snacks: Let the chips fall where they may
After four years of mediocre sales increases, partly the result of sodium consciousness, consumers are again reaching for potato chips, tortilla chips, popcorn and cheese snacks, according to Chicago-based Mintel International. The recession may have helped: Eating out less, brown-bag lunches and the relative low price of these products have helped snack sales over the past year. But Mintel expects less stellar results as the economic recovery takes hold.

Crunching the numbers on salty snacks, potato chips are the clear winner for the past two years. Sales were up 22 percent (if only our stock portfolio could do as well). Other salty snacks also did mightily well during the same period: cheese snacks saw gains of 20 percent, tortilla chips were up 18 percent, and popcorn popped up 17 percent.

Mintel reports that 50 percent of kids, teens and 18 to 24-year-olds say they eat salty snacks five times a week or more, and adults eat salty snacks 4.8 times per week on average. Some 65 percent of the adults interviewed say they are interested in healthier alternatives, such as grain or baked varieties, while 57 percent say they want to see more pita chips or crackers. However, half of the respondents do not think lower-fat/sodium snacks taste as good as the originals.

"Salty snacks have fared very well amid the recession, and Mintel predicts that sales will increase 22 percent from 2009 to 2014 to reach $21.7 billion,” says Senior Analyst Chris Haack. “In 2010, we expect a sales increase of 4.4 percent as people continue eating in and brown-bagging it."

Last year, the Snack Food Assn. (SFA) hired Cypress Research Associates to interview executives from salty snack companies to identify the impact of the U.S. economy on their firms and what strategies they have for growing sales. Most agreed the primary product focus relating to healthy is not fat-free products “Rather, it centers on reduced fat/lower calories, trans-fat-free and non hydrogenated oils, reduced sodium, shorter ingredient lists, no preservatives, product fortification (fiber, omega fats, flaxseed), no MSG and artificial colors or flavors, non-GMO ingredients and gluten-free,” according to SFA President Marjorie Troxel Hellmer, writing in Snack World.

Launching new products with long-term success is a challenge. Cypress found that flavor innovation trends include: ethnic (Hispanic, Asian, Mediterranean, and Caribbean), bold/intense/spicy, heat and sweet, sweet and salty, comfort food-inspired, restaurant-inspired, fruit flavors and flavor fusion.

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